I am an HR manager working for a US company that sends employees on long term assignment abroad. One of our senior assignees recently rang me to say how worried he is about Greek politics and the potential effect on the Euro. He wanted to know what I was going to do about it. I was a bit puzzled at first as, obviously, I can’t sort out a European currency crisis, but it turns out that what he is really worried about is his own pay. His salary is set in Euro, and he is worried about how he will pay his US dollar mortgage and his mother’s US care home bills if the Euro falls. I reassured him that we would look at his salary again if that happened (which didn’t really satisfy him). Later, I began to worry about what would happen if I promised a pay raise and then the value of the Euro rose against the dollar again. What can we do to make things more secure for our employees working overseas without taking on too much business risk?

Answer: By Juliet Carp

Juliet Carp

There is of course no “one size fits all” solution as, generally, when currencies move someone wins and someone loses. There are, however, a number of tried and tested ways to reduce the impact of currency fluctuation on employees working abroad.

The challenge: Factors such as movement between home and host currencies, inflation, foreign exchange restrictions, banking practicalities, and the timing of delivery may all have an impact on the value of payments to employees working overseas.

Decisions to make: Employers need to decide: what currency payments to employees will be set in; what currency payments will be delivered in; where, geographically, payments will be made; and how any necessary exchange rates will be determined. Different arrangements could potentially apply to salary, allowances, expense reimbursements etc. Once decisions are made, ideally, they should be confirmed clearly to individual employees in writing. In many (if not most) jurisdictions there will be a legal requirement to do this.

Hedging: Often the costs of employing people are incurred in one currency but borne in another. For example, the home business may ultimately bear the salary costs of an employee whose pay is fixed and delivered in host country currency. It is possible to “hedge” these costs commercially in the same way as it is for other international currency transactions. So, for example, if an employee is sent to the Eurozone with a salary of Euro 200,000 a year, it is possible to “fix” the US dollar value of that salary cost. You could ask your finance team for assistance.

Split delivery: Many expatriates continue to meet expenses in their home country currency while they are abroad (e.g., home country mortgage payments, school fees and home taxes) and at the same time will be obliged to pay host country living expenses pegged to host country currency (e.g., housing, utilities, food, transport, local taxes). Often the employer will agree that a fixed portion of salary will be paid in the home country in home currency and the remainder in the host country in host currency. The currency and location split might be set at the outset or, more commonly, there will be a mechanism allowing change to those proportions and/or to the exchange rate at specified intervals or in certain events. (For example, significant currency fluctuations or divorce.) Whatever arrangements are agreed, they should be confirmed in writing.

COLA: Another way of managing fluctuating host country costs, for example if the host location is prone to rapid inflation or things are simply more expensive there, is to apply a cost of living allowance or adjustment (usually known as a “COLA”). Typically, this is an additional allowance paid on top of salary to take account of the difference between home and host country living costs. Usually COLA is set using objective data purchased from specialist consultancies. Data is available for different home/host combinations taking account of typical expatriate purchasing patterns. In some countries it can be difficult to apply a negative reduction to pay but for most a positive uplift will work. Review timing varies between businesses, as may the length of time COLA is offered for. Some businesses only offer COLA for the first year or two in the host location or apply a lower allowance after an initial period to take account of adjustment to “local” spending patterns over time.

Trap: Beware the temptation to increase pay when host currency falls and an employee loses out: the employee may “win” when the host currency rises again and it may then be hard to reduce salary. In many countries, it is difficult to either retain discretion to vary pay unilaterally or make deductions, even when this is expressly agreed.

Analysis: Generally it is worth thinking through every aspect of the employee’s package from expenses through to reimbursement by the tax authorities, to try to understand where currency movement can have an impact, before making decisions on company policy and individual terms.

Financial advice: Employees can be adversely affected not only by currency fluctuations but by longer term impact on savings, pension etc, for example in the event of bank collapse. Wise (and unregulated) employers generally avoid taking responsibility for employees’ personal financial affairs, and most would encourage employees who may have concerns about pension, investments, etc to seek their own independent advice.

Policy: Expatriates can be particularly demanding for HR to manage and you may find that a consistent company-wide policy helps to reduce the pressure for “special deals”. Clearly communicated early policy decisions made and documented before financial impact is felt by individual employees will usually be easier to manage, particularly in overseas jurisdictions where binding contracts and extensive employee protection are the norm.

Equality: Finally, employers should keep an eye to discrimination laws, particularly where “expatriates” and “locals” are employed by the same employer in the host country. It is worth asking whether there is a good commercial – and lawful – reason for treating people with different home countries differently?

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About Juliet Carp

Special Counsel in the Labor & Employment Group, Juliet is author of the leading textbook, Drafting Employment Documents for Expatriates, and is a regular speaker and commentator on employment law.......[more]

About Dorsey’s Labor & Employment Practice:

Dorsey is a business law firm with more than 550 attorneys across the United States, Canada, Europe and Asia. Our lawyers regularly handle every sort of employment matter, litigated and non-litigated. We have extensive, successful trial experience (including class and collective actions), as well as an outstanding record for obtaining summary judgments. Dorsey also has broad experience in advising, counseling, compliance and development, policy handbook review, training and other measures that can greatly reduce the likelihood of litigation or governmental enforcement actions.